Equities and Alchemy

Buyer Beware

October. This is one of the peculiarly dangerous months to speculate in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.- Mark Twain

10/31/16

Wall Street Short Seller Betting Against Canadian Real Estate

July 5, 2016 Marc Cohodes wants to make money off Canada's real estate market, but not by flipping houses or renting out micro-condos like other rich speculators...Cohodes has spent three decades of his career as a Wall Street short seller, which means he's pretty good at spotting bubbles and betting against them just before they burst.

Cohodes walked away from trading after he made a controversial but accurate bet against Lehman Brothers in 2008, which put his $1.5 billion hedge fund at odds with their prime broker Goldman Sachs. Now he runs a chicken farm in California.Seeing Canadian housing values skyrocket over the last couple years, Cohodes couldn't stay out of the game. Like the guys in The Big Short, he's got a hunch that something is out of whack, and he's hoping to make some cash off at least one company's downfall.VICE reached out to Cohodes to learn why he's pissed off about Canadian real estate regulation, and what he thinks young and broke renters should be doing about it.

VICE: Can you tell me a bit about your short-selling career?

Marc Cohodes: I've been at this since 1982, professionally I've done it since 1985. In Canada I would short Clearly Canadian, Cott Beverages,
I would short the various resource flame-outs over time. In the United
States I'd short Krispy Kreme donuts, I would short the mortgage fraud
players when we had our housing debacle. I've been around some real
winners. A lot of battles, scars, victories, defeats—the whole thing.

So from your experience, what makes you think Canadian real estate is worth betting against?

Let's
focus on Vancouver, which is a lovely town—I love going there, I have
friends there. I think what's going on is sort of tragic. In Vancouver,
housing is being traded like penny stocks on the old Vancouver Stock
Exchange. There are no economics whatsoever behind housing in Vancouver.
Statistics show the average family makes $80,000 a year, and for
argument's sake I always say double that, even make it $200K. The
multiplier on what you can afford is between four and six—and yet these
properties are trading at huge multipliers to that.

So who on the Canadian market have you decided to short?

The
only Canadian stock that I'm short [selling] that affects housing is
something called Home Capital Group, which trades in Toronto under the
symbol HCG. In Vancouver there's nothing to short. People ask me about
it all the time. I don't stand to profit by Vancouver collapsing, I will
make zero money. What I'm doing, is speaking out through the
experiences I've had in life, that this is a disaster waiting to happen.
I'm trying to flash a red light, so politicians and regulators act to
avert or control a disaster.

Is this an imminent disaster? When do you see the bubble bursting?

It
can last. It can blow. There's no real way to predict when it will
happen. But here's what you know for sure: you know China has capital
controls on—they restrict their citizens from pulling more than $50,000
out of the country. So when a college girl buys a $31 million place in Vancouver—who
has no income, who can't answer questions about what her father does
for a living, who can't answer questions about where she gets the
money—you know the Chinese don't want this going on. They're pissed
about capital flight into YVR. Toronto as well.

At any point in time,
the Chinese can crack down on people, on Canada—they can do whatever
behind the scenes to make it end abruptly. Without warning or notice...

At some point a cool mind should say, "Hey, why don't we just have open
disclosure of who owns all these properties?" That's a real solution.
Like in Sonoma county, if you want to go to Santa Rosa, and pull the
deed for a farm which I own, it'll say: here's who owns it, here's what
was paid, here's when it was bought, here are the bank loans involved.
So why can't Canada or BC have this open disclosure?

But what would disclosure really do in terms of bringing down prices?

What
it will do for journalists, for regulators, for people who are
interested, is they'll see where the money is coming from, if laws are
being broken, if crimes are being committed...

Because when you buy
something and don't occupy it, when you launder money through housing,
it will absolutely destroy the community. Instead of going to
restaurants and buying movies and sending kids to school, they don't do
any of this.

The money gets tied up in places to live, but the economy
suffers and suffers big. It makes the costs for people who want to live
in Vancouver go up, and then if you're running a bakery you can't afford
to hire people to work there. The business goes down the drain because
you don't have any customers. And it becomes a vicious, negative loop.Which is bad.

That does sound bad. But what does
that mean for, say, a twenty-something who is obviously not invested?

What are young people supposed to do?

Rent, rent, rent and
rent. Because when things blow, you're going to want to have cash to
come in and buy. And you will have an opportunity. Because when things
go, they're not going to go by a little bit. They're going to go by a
lot.

Why, what gives you that feeling?

Because
at the end of the day, the pendulum goes too far in all directions.
It's gone way too far on the up, and it's been fueled by laundered money
on top of mass speculation. You've had this force and effect where the
banks have also helped foster this. When things blow, said money
launderers are going to have to sell, but there'll be no bids in the
market, because affordability in these places is still out of control.
When things get cheap enough, banks won't be in a lending mood unless
it's sort of a steal. Then I think prices will come way, way, way down.
That's when your millennials, your 28-year-olds, your 30-year-olds will
be in a position to buy. Right now you're so, so far from that. But when
things break, they're going to break huge. Just have patience and wait
it out. Don't get sucked in by the propaganda of 'It always goes up.'

Should young people also be betting against Canadian real estate with their tip money?

God,
no. I say don't try this at home. What people should do is keep their
eye on the situation, and actively engage regulators. Asking for full
disclosure of records is not a bad start.

About Me

Jennifer believes we live in the garden of Eden and I believe that we are destroying it. Our saving grace is within ourselves, our faith, and our mindfulness. We need to make a conscious effort to respect and preserve all life.

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